Alexander’s, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015. Alexander’s is a REIT engaged in leasing, managing, developing and redeveloping six properties totaling approximately 2.178 million square feet in the greater New York City metropolitan area. Vornado Realty Trust manages the company and provides leasing and development services; Vornado owned 32.4% of outstanding common stock at March 31, 2015.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $52.0 million | $49.5 million | +$2.6 million |
| Operating income | $24.4 million | $24.5 million | -$0.2 million |
| Operating margin | 46.8% | 49.6% | Lower |
| Net income | $17.8 million | $15.2 million | +16.9% |
| Diluted EPS | $3.49 | $2.98 | +17.1% |
| FFO | $25.1 million | $22.5 million | +11.8% |
| FFO per diluted share | $4.92 | $4.40 | +11.8% |
| Net cash from operating activities | $45.1 million | $40.3 million | +$4.8 million |
Property rentals increased to $34.5 million from $34.1 million. Expense reimbursements increased 14.4% to $17.5 million, primarily from higher real estate taxes and reimbursable operating expenses. Operating expenses increased 15.5% to $19.0 million, largely offsetting the reimbursement increase and reducing the operating margin.
Interest and debt expense declined to $6.9 million from $9.7 million, primarily due to refinancing the 731 Lexington Avenue office loan in February 2014 at LIBOR plus 0.95%, replacing a prior 5.33% fixed-rate loan. Depreciation and amortization was $7.4 million, and income tax expense was $3,000. FFO is a non-GAAP measure and should not be treated as cash flow from operations or cash available for dividends.
At March 31, 2015, total assets were $1.433 billion, including $239.3 million of cash and cash equivalents, $25.0 million of short-term investments, $84.6 million of restricted cash and $45.1 million of marketable securities. Mortgages payable totaled $1.032 billion, compared with total equity of $348.8 million. The estimated fair value of debt was $1.022 billion.
Cash Flow, Dividends and Liquidity
- Operating cash flow was $45.1 million, compared with $40.3 million in the prior-year quarter.
- Investing cash usage was $14.9 million, primarily for construction and real estate additions related to the Rego Park II apartment tower.
- Financing cash usage was $18.7 million, including $17.9 million of dividends and $0.8 million of debt repayments.
- Cash increased $11.5 million during the quarter to $239.3 million.
- The quarterly dividend increased to $3.50 per share from $3.25. The dividend exceeded reported GAAP earnings per share for the quarter.
- Management stated that operating cash flow and existing cash are expected to fund operations, dividends, debt amortization, recurring capital expenditures and Rego Park II development expenditures over the next twelve months.
Material Changes and Unusual Items
- The Rego Park I 100% cash-collateralized mortgage was extended for one year on March 10, 2015. The $78.2 million loan bears fixed interest of 0.40% and matures in March 2016.
- The $320.0 million 4.93% mortgage on the retail portion of 731 Lexington Avenue matures in August 2015; management intends to refinance it before maturity.
- Rego Park II apartment tower construction comprises 312 units and approximately 255,000 square feet. Estimated total cost is approximately $125.0 million, with $87.1 million incurred through March 31, 2015. Completion is expected in 2015, but timing and budget are not assured.
- Vornado-related fees increased to $2.8 million from $1.7 million, primarily due to $0.8 million of development fees and higher leasing fees.
- Unrealized gains on available-for-sale securities increased other comprehensive income by $0.5 million. The company held 535,265 Macerich shares with a March 31, 2015 fair value of $45.1 million.
Outlook, Risks and Contingencies
- Debt maturities include $320.0 million in 2015 and $78.2 million in 2016. Refinancing depends on capital-market conditions and the company’s ability to obtain acceptable terms.
- Bloomberg accounted for $23.4 million, or 45% of total revenue. Bloomberg extended leases covering 188,608 square feet for five years, but the rental rate for the extension period remained under negotiation.
- Sears litigation relating to Rego Park I alleges water intrusion, fire damage and accessibility violations. Sears seeks damages of at least $4 million plus estimated future damages of at least $25 million; the reasonably possible loss, if any, cannot be estimated.
- Construction may exceed budget or be delayed. The company also faces risks from tenant concentration, interest-rate fluctuations, insurance availability and costs, property-market conditions, construction costs and regulatory matters.
- Approximately $2.1 million of standby letters of credit were outstanding. The company reported no material changes to previously disclosed risk factors.
- The company’s interest-rate exposure included $565.8 million of variable-rate debt. Management estimated that a 1% increase in base rates would reduce annual earnings by approximately $5.7 million, or $1.11 per diluted share. A $300.0 million notional interest-rate cap limits LIBOR to 6.0%.
Investor Verification Points
- Verify refinancing progress and terms for the $320.0 million 731 Lexington Avenue retail mortgage due in August 2015.
- Monitor Rego Park II construction costs, completion timing and expected leasing or operating performance.
- Assess Bloomberg’s creditworthiness, lease-extension rental rate and concentration risk.
- Review dividend sustainability relative to recurring operating cash flow, FFO and development funding needs.
- Track the Sears litigation and any developments that could result in material liabilities or property expenditures.
- Distinguish FFO from GAAP earnings and operating cash flow when evaluating performance and liquidity.